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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson’s Investor Conference Call. During today’s presentation by Emerson management, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded today, November 6, 2018. Emerson’s commentary and responses to your questions may contain forward-looking statements, including the company’s outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson’s most recent Annual Report on Form 10-K as filed with the SEC.
I would now like to turn the conference over to our host, Tim Reeves, Director of Investor Relations at Emerson. Please go ahead.
Okay. Thank you, Gary. I am joined today by David Farr, Chairman and Chief Executive Officer and Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer. Welcome to Emerson’s fourth quarter 2018 earnings conference call. Please follow along in the slide presentation, which is available on our website.
I will start on Slide 3 with the full year summary. 2018 was a year of strong growth, operating performance and cash flow execution. This slide compares our actual results to the initial 2018 guidance from a year ago and which we over-delivered on almost every metric. Emerson underlying sales grew 8%. Automation Solutions was up 10% underlying, with growth across all world areas. Commercial and Residential Solutions grew 4% in 2018, following 5% growth in 2017 and has delivered nine consecutive quarters of underlying growth. GAAP EPS included over $0.20 of net one-time items, including $0.30 benefit of tax reform adoption partially offset by acquisition accounting and other charges we highlighted throughout the year. EPS growth was strong and benefited from core operating leverage as well as the lower U.S. corporate tax rate due to tax reform. Operating cash flow of $2.9 billion is 17% of sales and free cash flow is $2.3 billion and reflects a 114% conversion, excluding non-cash discrete tax items recognized in net earnings. In 2018, we completed our 62nd year of consecutive dividend increases and returned more than $2.2 billion to investors, including $1 billion of share repurchases. We also deployed $2.2 billion for acquisitions across both business platforms. These acquisitions represent important components of our long-term strategy and our path to 2021 EPS of $4.50 laid out at our February investor conference.
So turning now to Slide 4, our fourth quarter results were at the high-end of guidance discussed on our third quarter conference call. Underlying sales growth was 8% in the quarter and September trailing 3-month underlying orders were also up 8%. GAAP EPS was $0.97, including an $0.08 discrete tax benefit. Excluding this item, EPS of $0.89 was up 16%.
Turning now to Slide 5, fourth quarter gross margin was up 150 basis points on strong operating leverage and the benefit of cost reduction actions. Reported EBIT margin was down 30 basis points, including dilution from acquisitions that closed in the fourth quarter and the impact of a $24 million discretionary one-time 401(k) contribution to every member of our U.S. workforce as discussed on our Q3 call.
Turning to Slide 6, from a geographic perspective, the momentum we have seen over the past year continued in Q4 with broad-based demand and favorable trends across the world areas. Underlying sales were up 8% in both Q4 and full year. Mature markets were up 7% in Q4 and in the full year led by North America. And likewise, emerging markets were up 8% in Q4 and in the full year led by Asia.
Turning now to Slide 7, total segment margin was down 10 basis points, including recent acquisitions. Total segment margin was up 70 basis points to 19.9%, excluding Q4 acquisitions of AVENTICS and Tools & Test. This improvement reflects 30% core incremental margins in the quarter. Q4 cash flow was very strong. Free cash flow of $721 million is 15% of sales and free cash flow conversion was over 125%, excluding the non-cash discrete tax benefit from net earnings. Trade working capital improved 50 basis points driven by receivables and inventory performance.
Turning now to Slide 8, Automation Solutions underlying sales were up 9% in the quarter and up 10% for the full year. September trailing 3-month underlying orders were up 11%. Strong demand for MRO continued through the quarter. KOB2 upgrade and optimization projects also continue to drive growth across our key markets. Projects like the one Emerson announced yesterday, a $32 million contract to modernize a gas processing facility in North Africa. Strong demand continued in North America and China with broad-based investment and project wins across our key end markets. Outside of China, growth continued across the rest of Asia supported by solid MRO demand and improving investment activity, especially in India. Growth in Latin America accelerated in Q4 as the investment climate continued to improve in the region, especially in Brazil and Chile. Automation Solutions segment margin was up 80 basis points and was up 140 basis points, excluding the AVENTICS acquisition. This improvement was driven by leverage, the benefit of prior year restructuring actions and favorable mix.
Turning to Slide 9, Commercial and Residential Solutions, underlying sales grew 5% in the quarter and were up 4% for the year. September trailing 3-month underlying orders were up 3%. North America growth was driven by very strong commercial and residential air conditioning demand as well as strong demand in cold chain and professional tools markets. China growth was driven by cold chain and air conditioning markets offset by slower heating demand. Solid growth continued in Europe reflecting favorable trends in cold chain and professional tools markets. Margin decreased 150 basis points as material inflation and other inflation was partially offset by price realization, operational leverage and the benefit of prior period restructuring actions.
Let’s turn to Slide 10, which outlines our 2019 guidance framework and Q1 expectations. With a strong macroeconomic environment and favorable trends in our short cycle end-markets as well as longer cycle capital investments, we believe our momentum in 2018 will continue in 2019. For the full year, we expect underlying sales growth of 4% to 7% with Automation Solutions up 5% to 8% and Commercial and Residential Solutions up 3% to 5%. The stronger dollar results in an FX translation headwind for the year. Assuming October 31 FX rates hold for the remainder of 2019, we anticipate a $330 million unfavorable impact to net sales. The solid underlying growth we expect to deliver incremental margins of approximately 30% across our business platforms, driving GAAP EPS of $3.55 to $3.70 or growth of 3% to 7%, including over $0.20 of net headwinds from discrete tax benefits and other one-time items recognized in 2018. Excluding these prior year one-time items, our EPS target reflects double-digit growth. Our exceptional 2018 results and outlook for 2019 keeps us firmly on the path to $4.50 EPS in 2021 as presented at our investor conference in February. We anticipate also another strong year in cash flow as we continue to drive operations execution and incremental cash flow from recent acquisitions. 2019 operating cash flow is expected to be $3.2 billion and free cash flow conversion north of 100%. For Q1, we anticipate 6% to 7% underlying sales and EPS of $0.65 plus or minus $0.02. FX is expected to be a 2 points headwind to net sales and $0.01 to $0.02 drag on EPS.
Please turn to Slide 11 which bridges our 2019 GAAP EPS guidance. In 2018, we had discrete tax items that drove a 16.6% effective tax rate versus the 25% we expect in 2019 and going forward. This $0.34 headwind is somewhat offset by one-time charges in 2018 that created a tailwind in 2019, including $0.09 of acquisition accounting charges and $0.03 for the one-time 401(k) contribution charge in Q4 ‘18. Together these items, net to more than $0.20 headwind in 2019. Next year, we expect to drive over $0.40 of EPS from operations execution and acquisitions or more than 10% EPS growth. The strength of the dollar against most major currencies drives the foreign currency translation headwind next year. Assuming October 31 rates for the remainder of ‘19, we expect currency to result in a $0.06 drag on EPS. And now please turn to Slide 12 and I will hand the call over to Mr. David Farr.
Thank you very much. Welcome everybody. The first thing you got to know as many of the people have been following me for a long time, over a year ago, I lost Zorro, my wife and I loss Zorro. And exactly 14 months later we decided to add a new member to the team. So I am introducing Rocket, a tri-colored King Charles Spaniel who is now 11 weeks old and Rocket is an individual that can move a little faster than Zorro kid in the later years, little bit more versatile and he is bringing new life and energy. As you can see in the order chart, we had a good finish to orders and I will talk a little bit about orders and where I see the growth going forward in 2019. But again, Rocket is engaged. He is ready to go and take us to the stronger performance in 2019 and 2020 beyond. So, I want to welcome everybody to Rocket. Now, we will obviously use him, as I did Zorro for many years as comparisons in jumping and earnings growth and things like that.
So, with that, first of all, I want to welcome everybody today. I want to thank the global organization of Emerson for their support and tremendous execution over the last 12 months. We had a very strong fourth quarter. We did exceed what we communicated to you in August. We said that we will be delivering good solid growth around 7% and underlying sales and we said that EPS would be at $0.86 plus or minus $0.02 and we came in at $0.89 plus unique tax restructuring that Frank and his tax team put in, which benefits us over the long-term. So a very strong fourth quarter, on top of the rest of the year, it was an exceptional year of growth in earnings, in sales, cash flow, returns, return on total capital, growth through 20% again this year and 2018 and the Emerson team did an outstanding job. We also returned over $2.2 billion of cash to our shareholders. And we have made continued excellent progress on the free cash flow, the cash dividends ratio, this year, we have got it down to 54% and the OCE is totally focused on getting that number under 50% in 2019, which is basically 18 months ahead of what Frank and I presented over the last couple of years since the repositioning effort in 2016.
But more importantly, great 2018, moment of joy, we are moving on to 2019. And I really want to make sure the global team understands a great year in 2018, but we got to continue to drive the growth, the improvement in margins, the improvement in cash flow, we need to make sure that we continued successful integration of the acquisitions, investments we have made over the last 2.5 years relative to the Pentair valves and controls, relative to AVENTICS, relative to Paradigm, the Textron Tools & Test business, we need to make sure that they deliver accretion and earnings and they deliver incremental positive cash flow for the corporation and for us to invest and payback to our shareholders.
But as we look at the orders and we finished the orders last year, you can see that we had a continued trend on a positive note, I think up and around the 6%, 7%, 8% range for several, several, several months. We see that trend continuing in the first part of this year. But clearly, the global economy is changing. And as you think about our underlying sales growth that Tim presented on Chart 6 and I look at what we are saying this year in the 4% to 7% guide, let me give you a feel for what we see happening around the world right now tied to that 4% to 7% guide. Last year, the United States grew basically a tad over to 9%. We believe the U.S. growth, underlying growth this year would be in the 6% to 8% growth. We see still good momentum and our customer base is spending money, the U.S. economy is still solid, it’s still growing. Yes, people can say the marginal growth rate slipping, but it’s still at pace where people are investing, including companies like Emerson. We look at Canada, which grew last year around 12%. We see Canada slowing down in this 5%, 6% to 8% range like the United States as they continue to invest in materials, in the oil and gas, in those mining areas as they are important to Canada.
As we look at Latin America, we see momentum in Latin America. From the standpoint of overall last year was 4%, in the fourth quarter, they did 10%. As I look at next year, I think that we are going to be in this 5%, 6%, 7%, 8%, maybe if we are lucky, I will be talking in the quarters that we have double-digit quarter growth in Latin America to one area that I believe that are now kicking in as I said last year they had to prove it to me and they are now starting to prove it to me. So, I would say that, that is one of the places I feel good about. Europe last year was around 2%. I don’t see much change. I think Europe is going to grow in this 2% to 3%. The economy is settled down to a lower growth environment. We have unique opportunities there, but still I don’t see a very strong robust Europe at this point in time.
Asia last year, outside of China was at 10%. As I look at it now, I think we are aiming to 6%, 8%, 9% range where we have seen good investments in India, Southeast Asia, Australia is investing well right now and some of the raw materials and mining areas. So a pretty good environment for us right now in Asia. The China situation clearly as people are concerned about it, our order pace has continued to be very strong in China in the Automation Solutions. Overall, we have delivered 17% growth last year. I a looking at growth more in the 7%, 8%, 9%, maybe 10% if we see a little pickup in the second half of the year and Bob Sharp’s business around commercial residential solutions, but at slower growth, but still a pretty good growth pace for us as we see it. I would say, it’s going to be driven by Automation Solutions where last year this was driven by commercial residential.
Middle East and Africa, which had a good year around 6%, I think we are going to see a very similar type of growth rate 4%, 5%, 6% in Middle East and Africa. So again, we are having all of the world area – global world areas contributing to our growth. Our emerging markets last year grew faster than the mature markets. I expect that to happen again this year. The other key issue as we see it right now, last year at this time the wins were basically to our back as I told the board today I see cross wins today.
We have wins cutting in front of us and back of us on the side. Overall though, it’s still pushing forward and I am optimistic for our business profile where we are right now that we will still see good underlying growth. That’s why we put the 4% to 7% underlying growth sales out there. We will know more as we get into February as we did see what happens relative to some of the discussions going on in Asia. But overall, we feel very good about where we are going. We had some issues that we have to overcome. As Tim said, relative to the headwinds, it’s a little bit around $0.20. But our incremental margins, our acquisitions and the benefits that we have from our share repurchase program clearly will help us on the negative side, clearly the stronger dollar does sort us at this point in time, but we are putting forth I think a very good earnings forecast, a very good sales forecast and I think we will continue to outperform the market as we did this year relative to our global spaces as we performed extremely well across Emerson and around the world.
So again, I want to thank everybody across Emerson for an outstanding year, a year that’s really exciting. We have a lot of work cutout for us. The forecast we put in place right here keeps us well on the line towards the 2021 plan that we laid out in February to the investors both from a sales standpoint and execution around acquisitions on a share repurchase program and then obviously incremental margin performance. So that’s where we sit right now. We feel good about it. I feel good about how the team executed this year as did the board today as we reviewed the final results with them. And I look forward to delivering a strong performance for Emerson, for our shareholders again and in fiscal 2019.
And so with that, I will open the mic for questions and look forward to an interesting debate with my investors and sell-side analysts.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Sprague with Vertical Research. Please go ahead.
Good day, Dave. How are you?
Not too bad, Rocket says hello to you Jeff. He is ready to nibble on you.
Alright, well. He is a cute little guy. He actually looks a lot like the pokey little pup that I learned to read with. And I guess if you put up 4% organic growth, pokey is going to be a little bit better name perhaps. What has to happen to get down to 4, Dave, those ranges you laid out there that don’t really seem to even bring 4 into the conversation?
I think that the range – 4 comes into play the following. We do have a lot of tension with China. And what we see would be the consequences of about that would slow down, what I would call not only China growth all across Asia-Pacific growth. So, I think that’s why I am putting that stake down there, Jeff. You are right, if you add up the numbers, it will be more like a 5 at the low end. My core belief does not believe and say that, but in the same time, I want to make sure if investors understand, there are concerns that I would have would be in Asia, would be around China. I think Europe potentially could weaken. As you know, there is a lot of political uncertainty in Europe right now. Even though we don’t have a robust growth, I am always concerned about when the political uncertainty comes in Europe. So, those are the markets I am really worried about. But my gut tells me we are still going to be in this solid single-digit range and we are not going to be as strong as this year at 7.7, it was a really strong year. But we are going to do better than the underlying GFI, which is probably going to be around 3.8%, 4%. So that’s how I see it.
And Dave, on the question of projects right on the last call or maybe it was two calls ago, there was a sense that things were really kind of getting to the altar and people needed to pull the trigger. The resources weren’t going to be there. I assume that still stands. But do you see people hitting the pause button a little bit on bigger projects because of all these uncertainties or do you think the bigger projects that are in your funnel actually do start to kind of come into play here?
Well, we believe they are going to come into play. We reviewed with the board today, Lal reviewed with the board today. About 6 or 7 significant projects, we are seeing more KOB2 right now like you did saw one today, which there is people that means kind of business tool which means upgrades and brownfields. The big projects are still being worked on ongoing in with Lal and Mike into Japan next week on a couple of large projects for the Middle East. So, right now, I don’t see any delay happening. I still believe the larger projects will be rear end loaded in this year and then we won’t really see much of that growth coming into probably 2020, but we will see a little bit in the fourth quarter based on the projects, but the project size are getting larger. Right now, we saw bigger ones as Frank saw today with Lal reviewing the board and we have seen – we see no delay right now. But clearly, as I said, there is a lot of cross winds going on. And so some of these winds shift and do a little sheer work on it, you could see a company like Emerson gets sheered. But right now, I still feel very good about it. We will give you an update on the overall projects in the funnel again in February, but as we finish the year, the order pace was pretty good. I mean, the early indication that October was decent again, a solid growth. A number for that green line on the Chart 12, the concern is clearly around Commercial and Residential in Asia after China is really starting to pullback in some of the funding, but I feel good about it right now, so the new Rocket, the new day, feel pretty good.
Great. I will leave it there. Enjoy the puppy. Best of luck.
All the best to you. Thanks.
The next question comes from Steve Tusa with JPMorgan. Please go ahead.
Hey, Dave. Thanks for taking my question. I appreciate that. Jeff is not a bad actor, that’s fine. It’s fine.
I mean, Jeff sent me a beautiful vest. You did never send me a frigging vest.
I am not in the bribing management team. So, let’s leave it at that.
That is not a bribery when those JPMorgan funky vests that you wear sometimes. That’s okay, let’s go on Steve.
I am sure you want from Jamie. So just on the first quarter guide, $0.65 plus or minus, was a little bit below, where I was expecting, anything going on in the quarter that would kind of make that below average from kind of a normal seasonality perspective, because if I just do kind of the way your seasonality worked last year, you need a bit of – a bit more EPS in kind of the final three quarters to kind of get to them in point of the range. Obviously it’s a different portfolio than it’s been in the past, but I am just curious if there is anything in the first quarter that plays around with that dynamics?
No, I am not. Nothing right now, from my perspective, obviously, we have the currency probably on $0.02 currency hits us in the EPS. We had some things that came through the P&L in the first quarter last year that won’t come back. I would say that if we can drive little faster growth, I think it will be better on the execution. From my perspective right, there was nothing going on the business. I just think that after you have a good fourth quarter, you have come off – sometimes, I am a little bit nervous about how that first quarter comes unfold, but nothing is happening in the business at all at this point in time and let’s see how the orders unfold here in the next couple of months. And I will give you a better feel for it, but there is nothing going on at all, Steve, nothing.
I guess when you are thinking about a lot of the management team so far giving some pretty good color on impact of tariffs and maybe you put that into the kind of price cost bucket, but what are you guys kind of seeing, what are you incorporating over the next 12 months as far as the impact from all these new list that are out?
Quickly, I am going back to the point real quick for that question Frank, just point out that our last year, our tax rate in the first quarter was under 22% this year, we’re going to be probably a little bit over 25% so we have there’s going be a lot taxing is going and now it’s that, tax reform came through and hit us so that’s one of the biggest headwinds that we’ve got from the standpoint of quarter-to-quarter and now, if we can make that 25% better, that we will straight out to do, but that’s the biggest headwind that we see right now in the first quarter I just want to I just Frank just pointed out.
But that shouldn’t impact the normal seasonality on the entire year, right? I mean, because.
No, it’s not going to impact it yes, it will change, because kind of the tax rate in the first quarter, last year was little bit around 22, it was 21.6 this year, it’s going be around 25% and so, that does impact that seasonality let’s go back to the our headwinds right now that we’re looking at is basically, we’re looking a little bit over $100 million, assuming that the President does not implement the second tranche and so, it’s more like a $120 million at this point in time we are, obviously, executing the pricing around that clearly, the pricing is going in it does not give you any margin, so that obviously gives you a little pressure from the standpoint we have to figure out how to get cost reductions offset a little bit more of that but pricing is going in and we’re making that happen but clearly, as you well know as the number this year is significantly higher than last year, which was closer to more or like the 25%, effective cost impact to us, this year, it is going to be closer to $120 million and therefore we’re going to have a much higher pricing in that margin there will be a little tag there, degradation of the margin because of the offsets from obviously the price, but you don’t get leverage in that price.
Does that incorporate everything on kind of all these lists today or everything is kind of okay got it.
Yes, as of today.
Okay, got it.
It’s all in the only thing we don’t have in there right now is that the President makes the decision and that most recently as he said that he may increase it to 25% and on January 1 so that does not incorporate that, because then we do not have that, it’s very hard for us to trigger price increases on anticipatory tariff type stuff so right now, it’s a little bit under $125 million and that’s what we’ve got set in motion and that’s our plan is being is unfolded.
Got it. Was just kidding back Jeff, by the way nothing, but respect for Jeff.
I know that and we respect you take care my friend take care.
Alright, bye.
The next question comes from Rich Kwas with Wells Fargo Securities. Please go ahead.
Hi, good afternoon, Dave.
Good afternoon, Rich. You want to complain about your order too I mean your factory number 3 in the list, you want to complain me? I got. I mean, Sprague complains, Steve complaints, Jim also complains, so you want to you will file complaint at the front of the line okay?
I’m going to save my bullet first, something in the future.
That’s a really smart guy.
Just a follow-up on Steve’s question so, it doesn’t include the 20 the increase of the 25%, so do we multiply this by 2.5x or if we go to 25 I mean that’s probably wrong, but I mean just can you give us a favor for if the rate goes to 25?
Our rate will be around 25 this year, our effective rate was 16.6% as we showed.
No, I met the tariff increase so the tariff rate for China.
No, you can’t you cannot multiply, it means I mean Frank, what you think it’s going to be less than $20 million?
It’s order magnitude $15 million to $20 million.
Okay.
If it goes from 10% to 25% on the list 3.
Yes, that’s, and I got to believe that he made this, the President may look at or the congress may look into which ones will go, some may go to 25, some may not go so we’ll keep you informed but I would say, you probably think about another $10 million to $15 million on top of that, if that triggers, and obviously that means we have pricing that try off set that.
Okay good and then on the mix of business, so it seems like for the year, at least in automation solutions more mix of MRO is still pretty healthy, some KOB2 coming in, but you’re still pretty comfortable about 30 plus on a core basis for incremental margins and then, what does that assume for investments, because I know you had talked about making investments in ‘19 ahead of project activity and getting people around etcetera?
As soon as we make the investments, we have to be very selective, we make these investments this incremental margin is very important to the OCE and to the whole company and so we’ll have Lal and his team will be happy to making the trade-offs and we expect them to deliver a 30% plus incremental margins and they’ve got to make those trade-offs where they are going to make those because we’ve got to make the investments and the support of the larger projects we have got to make the investments in the service organization as we continue to try and increase our share in and around KOB3 on the kind of business the aftermarket business so, where we’re going to make the investments, we are not cutting back on that, but this incremental margin is very, very important to us and their growth rate is now up and running at a good pace, which last year start out slower and they build up so Lal and his team has to figure out how to make that margin be a little more efficient and deal with that world because we need him to deliver the 30%, because the Commercial and Residential have a good couple of years and most likely their growth rate is going to dial back a little bit and so automation solutions has to carry a little bit heavier load right now.
Okay. And then last one on buyback how should we think about buyback for ‘19?
$1 billion.
Okay.
$1 billion and as I, as we laid out, in February, our target is basically to do $1 billion between each year between now and 2021 our target is to get down the total cash flow back to our shareholders down to a little bit under 60% which would include getting our dividend payout better in the ratio line too, but we always believe in giving money back to our shareholders, but at the same time, we want to make sure we make some incremental investments and acquisitions and so on.
Great good luck with that.
Thank you very much, Rich.
Thank you.
I’ll pass it in regard to Rocket. He is much nicer than us all.
The next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, Julian.
Hi, Dave.
How are you doing?
Very good thank you just a first question on the Commercial and Resi solution.
I’d always like to have little bit niceties before it was jumping I’d like to have a little chit chat at the day here before you jump right it and ask me to go out or something.
Well, I guess it’s a limited time 60 minutes so ask 3 or 4 questions.
You know, Julian, you know, there are rules to follow and rules not to follow, OK?
Yes, two questions as a good rule so I think, maybe the first one around the Commercial and Residential margins, those were down in both Climate and tool in the home in Q4. Just wandered how quickly you expect the margins to recover, particularly in the climate piece, understanding that Tool and Home has acquisition impacts through the whole of 2019? When do we get Climate back out?
I think it’s going to be more in the middle of this fiscal year 2019 our pricing actions are going in based on our agreements with our large OEMs but it does it takes time and I think we probably have one more quarter of challenging margin, out of them and I think that they’ve had a lot of things hit and pretty hard and they have to offset that but at the same time, they are taking the actions I feel comfortable that overall our price cost will be probably neutral this year at a much higher, higher level because when we apply north of $120 million of the pricing action to offset the tariffs and the other costs coming in so I think they probably have another quarter or two left of that Julian, and so, but I think Bob and his team are highly focused on getting that margin back and getting back up and having a good margin this year and we are banking on him to make that happen and so his organization is out there listening to them this is a year we need you guys to bounce back in and get the margin back to us for the shareholders so that’s where we see right now, Julian.
Thanks and then just secondly on balance sheet usage you have laid out the buyback pretty clearly how are you thinking about the M&A environment? The last sort of 12 months have been very busy on deals do you think there’s a lot of management capacity left to do a bunch more in the next 6 to 12 months? So, you think you’d rather hold off and make sure Aventics, Tool and Test intelligent platforms all integrated well?
As we reviewed with the Board today that we most likely will be looking at significantly less than $1 million – $1 billion of acquisitions this year so I would say, we’re probably going to be somewhere in the $500 million to $750 million at this point in time the focus of integration and the focus of delivering returns for our shareholders on the acquisitions we made over the last 2.5 years is very important so we have $200 million relative to the acquisition from the GE and then I would say, as I look at right now will be somewhere $300 million to $400 million elsewhere and that’s how we see at this point time if I see anything different, we will know by February nothing is going to come out before February so, but right now I see I see that we’ll do $1 billion of share repurchase, $1.2 billion, a little bit over $1.2 billion in dividends, and I would say right now, our dollar between $500 million and $750 million on acquisitions and from an acquisitions, our capital spending standpoint are down at $650 million Frank, is that right? $650 million.
Perfect, thank you very much.
Julian, you take care thanks.
The next question comes from Steven Winoker with UBS. Please go ahead.
Hello, Steve.
Hi, good afternoon I know you like to ease into it so I’m going to say, it’s important to pause and celebrate these milestones so congrats on 62 years of increasing dividends which every company, we’re able to do that so very impressive.
There’s a lot of people that they give me out a hard time and Frank a hard time Frank and I had a hard time when we made the decision to reposition, shrink the company and maintain the dividend, but I felt quite strongly from this organization and for our shareholder standpoint that was the right thing to do and we’re not quite has it I think, Frank and I want to see us get out of this year in 2019 and I think it is an important milestone, Steve, to support our shareholders around the world, a lot of people depend on that shareholder of that dividend including a lot of our retirees at Emerson.
Okay, that’s not one my questions though so for the.
I know that, that was the moment of joy and I appreciate that moment joy and I appreciate that little hug and I did see your backend, so get out of your damn question.
All right so the first one is just a little more color around the 30% incremental margin in terms of the puts and takes so what I’m hearing so far is price material cost excluding tariff is that, are you thinking that’s going to be green for this year? And then mix sounds like it is you’ve got KOB2 picking up and KOB3 as a percentage of sales sounds like it may be lower, which would be a headwind and then volume leverage and productivity versus labor inflation wage inflation just a little color for how you getting that 30% plus the investment you talked about?
So, on the price cost situation, we – I believe in the end, will be plus or minus a couple of million dollars on green, red now clearly from a pure dollar standpoint, the GP line, it’s a wash but it’s a little – will be a tag, could be tense, negative on the business overall as the headwind, but not meaningful headwind, relative to that relative to mix, I think the mix is, one of the United States and Canada and Latin America and stay reasonably strong for our growth next year, our mix with the KOB3, which is the aftermarket in repair and the early KOB2, our mix should be okay I start worrying about the mix for us more in the fourth quarter of this calendar of this fiscal year fourth quarter 2019 and then the fourth quarter or first quarter of 2020 so I don’t think the mix is going to be bad for us at this point in time so that’s why the incremental margins this year could actually be a little bit easier for our team, they’re are up and running we have an understanding of the price cost situations we’ve got – I think we’ve got our capacity pretty well structured Frank and Steve Pelch who went through the plans – operating plans, put the capital out there for these guys for productivity, for incremental capacity so right now I feel better about the margins, incremental margins this year than I did last year and that’s how I feel at this point in time.
Okay and what is the biggest driver to support any pretty specific about 3.8% to 4% GFI view globally, given all these uncertainties so if you had to kind of take the biggest question that would sort of support that in your Outlook what are the – what is it that you’re looking at?
The biggest support is U.S. If North America, which is United States, Canada, Mexico and the United States, Canada, Mexico continues to investments grow which we’ve saw if you think about those four that entity was last year for us was 9 at U.S., 12 in Canada and 4 in Latin America if they can deliver on average, what I’m looking at this forecast next year most likely around 6% that tells me that I’m looking at a decent year for us and that’s the at the core place if we see that happening, I feel good about it and as I told Jeff, early on my concern remains in Asia with as everybody but right now, we do not, our orders are still, Okay obviously Bob’s business is struggling a little bit right now but Bob allows this business is doing better, so on the good side, North America, on the concern side, is definitely China and Southeast Asia that’s how I see it.
Alright, David. Thanks. I’ll pass it on.
Take care, Steven. All the best to you my friend.
The next question comes from Nicole Deblase with Deutsche Bank. Please go ahead.
Yes, thanks good morning, Dave or good afternoon I guess.
Good afternoon Nicole.
I don’t even know.
You knew you did know Zorro, but you got to get to know Rocket is a cute guy.
He is super cute, so hopefully we get to meet him.
I’ll guarantee you will.
Okay so I guess starting with growth in AS 5% to 8% for 2019 I think this time three months ago, we were talking about maybe 9% to 10% growth I’m just curious, has anything really changed from your perspective? Or is it just some conservatism around some of these potential global growth headwinds?
So, the key issue is, I’ve always – I’ve talked about the 2-year window here I’ve always talked about it in basically 17% to 18% type of two-year window here and so with that basic 10% last year, I’m now looking – this is – I’ve been in this business longtime, it is typically around the 17%, 18% a really good year would be ‘19 on a two-year basis so we had a – if I look at the two years, the first year is 10% so now it is off 7% to 8% so maybe my downside concern would be is relative to around Asia and so I still think if I was putting a number on a piece of paper right now, it’s going to be around 7%, 8% for automation solutions with my concern being clearly the China, Asia-Pacific, with the whole term relative to the tariffs going on there, but I feel good so from my perspective, nothing has changed the marketplace, order pace is still pretty good but I’m always concerned about what could happen with North Asia in this next couple quarters.
Okay, got it. That’s fair. And I guess just kind of like elaborating a little bit on that comment you would spend a lot of time in China, talking to your customers quite often is there anything that you’ve seen that suggests that we are seeing a slowdown or is this just concerns over what could materialize over the next three quarters or so?
Okay on the Automation Solution side, the answer is we’ve not seen anything at all the order pace is still pretty good on the Commercial Residential, we are seeing it. We will we will have a tough first quarter, we kind of have a tough first half as you know, a lot of programs that we had going under way we’re being around the environment, the government was supporting investments to try improve the environment from the standpoint of burning coal and getting into cleaner energy they’ve cut that back and so we’re going to – after basically I think seven straight quarters of over 20% growth in Bob’s business in China the funds are now are starting to dry up and that is that definitely is as government refocuses it’s investments and I would say, Bob will have a tougher year in China and our Automation Solution investments are still going forward so that’s how we see the profile changing and that’s where we see the negative so if you think about other companies that tied to that within the space you file, I would expect them to be seeing a similar type of trade offs going on right now in China.
Got it. Thanks, Dave. I will pass it on.
Thank you, Nicole and all the best to you.
The next question comes from Nigel Coe with Wolfe Research. Please go ahead.
Hi, Dave. Good afternoon.
Good afternoon, Nigel. Good to see you, Wolfe. Where you located?
Grand Central can be better for me. It’s great yes. So, Keith congratulations on Rocket and congratulations on a great ‘18.
Thank you.
So, you mentioned China and you mentioned Europe, so the two areas that you are watching most closely for next year.
Correct.
No, evidence yet of problems, but if you think about crude and you think about the U.S. dollar, what are the break points on those two? Why you become more concerned about the next couple quarters?
So, from the standpoint of the just the dollar strength, I get nervous in particularly around Europe, when the Euro gets down of toward parity we got a long way to go from there we have always structured our structure relative to our European competitors around parity again, I get a little tighter at 105 than I do but it’s typically around parity so as long as the dollar stays, it’s been pretty tight band here from the standpoint of just competitiveness we are in very good shape at this point in time, but I do have a concern if the dollar continues to strengthen and it gets relative to European and gets all the way down toward parity which is a known indication that’s going to happen at this point in time, that’s where I get concerned overall relative to, again the dollar strength hurts us in certain cases, but also helps me from our cost structure and some – from the standpoint buying, obviously commodities around the world at a stronger dollar pace so it helps me from certain respects but, my European competitors right now are not as – say strongly in focus of relative to the competitive strength as we are today and so I think that I like our hand we have made some major investments in being competitive in Europe, got some major investments under way being competitive in North America and then same thing in Asia so, from a competitive standpoint, I like where we sit at this point in time Frank and operations made some good investments that should help us as we get into 2019 and 2020 being stronger competitiveness but the dollar gets the parity, I get nervous.
Okay. And then the GE acquisition I know you haven’t closed it yet, but it’s definitely a Tier 2 PLC supplier. Is your ambition here to build it into some extent compete with Rockwell or Siemens, or do you have more of a niche strategy here, and maybe compare it those two through the DCSs, maybe how do you see that acquisition evolving?
We will, clearly, it’s a Tier 2, but we are Tier 6 before this. So, it’s a step-up and I would – you give me that, weren’t you? I think our focus is as I’ve talked about, I’m being very careful because the deal has not been approved by anybody yet in close, but clearly our focus is going to definitely be on the core process markets of oil and gas and power and chemical. In the hybrid space, we’re very focused on the life science, food and beverage and mining. And what we want to focus hard on is the hard integration of – between our Ovation power platform and the DeltaV on the process side and then basically go after the sort of those islands of automation sitting out there in the marketplace that we can really go after and then also integrate that. As you know we have a couple of our own PLCs that we’ve developed at this point in time trying to make sure they have a place to play. We’ll get into more description of that as we get forward, but that’s the game plan we want and over time, it will be an investment, but we now have – the core technologies and we have a core market presence that we can grow over time. And many of you may or may not know when we brought out DeltaV, we were number 7 – 7s in the world in DCS. So, I wouldn’t underestimate our ability to go after this marketplace and given our installed base around those core process markets and our installed base around those select hybrid spaces I went after, I wouldn’t underestimate that.
Alright, Dave. I’d leave it at that. Good luck.
Thank you very much. All the best.
The next question comes from Andrew Obin with Bank of America/Merrill Lynch. Please go ahead.
Well, I guess its morning where I am. How are you?
Yes, what – where are you?
I am in Beijing.
Oh, congratulations. Is your office moved to Beijing, Andrew, is that what’s going on or…
Yes, I was going to outsource not quite, we were visiting some wonderful Chinese companies.
Good. Congratulations, and how is the weather like?
It’s actually, it’s quite clean. I don’t know if it is good or bad. I’ve seen sunshine in Shanghai and Beijing, I don’t know, it’s a good thing or a bad thing? So –
It’s a good thing. It’s a good thing. I mean the investments you’re making to clean up there, it’s good for us. So, well, thanks for joining the call today. I know that’s not easy to do, and I appreciate your interest in the company. So, far away, what your questions, my friend?
Alright. Just a question in terms of capacity ramp up in Automation Systems, how should we think about over the next two years and what is that due to incrementals in those business as you sort of bring on people to deal with the backlog?
From our standpoint that we – as we ramp up both on the capacity, the capital standpoint, which we basically got a good jump on this year when we spent almost $620 million of capital, up well over almost 30% or something like that in capital spending this year. For the capital standpoint, typically that has hurt us too much from incremental because of how we feather it in, but I don’t feel uncomfortable with our expansion relative to that. I think at 30% leverage, we should be able to handle the incremental investments in people and the capital. The business is there and the key issue for us is clearly to make sure we get that – get that capacity in and around the world where it needs us other end. We will slow down the capital spending this year, it’d be more in the $650 million range as we tie and digest what we spent last year in sort of the incremental work that we want to spend this year. But I think, we’re in pretty good shape. My concern on the capacity is basically making sure that we have it in certain locations around the world, with the U.S. in particular has been very strong. So, my North America capacity is being stressed at this point in time and we’re having to add some incremental capacity here in North America, including the United States, which we need to get up pretty quickly if we want to deliver as we get into 2020. So I think we’re in pretty good shape Andrew. I don’t think we’re going to have an issue here relative to complaining about deleverage of other people and ramping up. I don’t see that or feel that at this time.
And just a question also for revenue growth, what’s the impact of the latest DeltaV upgrade that you just announced. How much of that help revenue growth in 2019?
I couldn’t tell this, Andrew. I think it’s going to be a positive. I mean, right now, our Systems business will have a good year next year. I think that we saw our DeltaV system had a very good year. I mean, our Power business grew in 2018. We’re one of the few companies that grew in the power world. We grew. We had a very strong fourth quarter. I would expect – I expect our process systems down and also with the upgrades should do pretty well. And if we do say 7% growth, underlying growth for the Automation business, the Systems business should be north of that 7%. I mean, they – I would say they should be closer to 8%, 9% or 10%. I mean, that’s off the top of my head to just think about it. If we grow 7% underlying for the company’s, then systems should be – those systems of DeltaV should be close to 10%. That’s DeltaV, not the power, the DeltaV piece. So, I think the upgrade is going well.
Yes. Thanks a lot.
All the best to you, Andrew.
The next question comes from John Inch with Gordon Haskett. Please go ahead.
Afternoon, everyone. Afternoon, Dave.
Hey, John. How are you doing?
I’m doing well. I’m doing well.
I don’t know, we got a little – we got a hit, I think we got somebody was taped into our line it’s probably the Russians because of the voting here going on in Missouri today. So, Russians are probably taped into our line.
They are tapping into a lot of things. Hey, just a bit of a follow-up on this GE acquisition. I realize it hasn’t closed, but have a lot of these GE businesses that have been sold, buyers find afterwards they are in need of investment. Are you sort of anticipating that as well? And is the play really more of going, trying to get after their installed base, where you can maybe cross leverage a bunch of other things?
It’s definitely going after installed base. They have a couple of places. They are extremely strong in the installed base. So that’s number one we want to play and leverage that across. On the – this is – this company is more of a technology play from the standpoint of investing in technology is not a – it’s not necessarily a heavy capital play. We will lay out – what we are going to be – when we get this deal closed, we will lay out an accelerated investment of dollars for the technology to make sure we can take it to the different process industries and the hybrid industries that GE didn’t necessarily serve, but we have tremendous access to because of our DeltaV and also our instrumentation. But to your second point, it’s the number one issue for us is what we want to do is tap into their installed base, take that and really leverage that with our current capabilities. But it will take – what we’re going to do is we’re going to ramp up as Mr. Knight did back when we acquired Fisher and we started to build on DeltaV. We’re going to ramp up our investment in the leverage of this technology and we will lay that out what we’re talking about when we close it, but that’s clearly the game strategy for us. We’re going to have to ramp up their investment. This is one asset that I have to say, Jeff and his team kept investment going in. I was – we’re pleased with the technology and the capabilities and because that’s – that capital was making sure they have the right R&D, which is important and we feel good about that, but we’re going to make some more investments for sure.
Okay. So that makes sense. And just in terms of the Automation Solutions business, you guys called out that September orders were up 11%, with implication that September’s cadence was a lot better than the prior two months and doesn’t that – if that’s the case, doesn’t that give you actually a little bit more encouragement for kind of this first quarter guide here, or is that more of a longer-term – those orders I guess just spread out?
No, I think the key issue for us is you got to keep in mind, there are incentive plans put out there for sales and orders and stuff like that, and this is the last month. And so the Automation business had a far better year than we thought originally, so they were gunning. I think it does. If we see another strong double-digit order pace in October and November, that makes me feel much better relative to the start of the fiscal year and then also the first half of the year. So give me how the follow-through goes, initial read on October is good and probably in line with what we saw here in September. But I want to see, October, November, you’ve heard me say this before, are the fiscal year, which you have a great year and the bonus payments for the Automation guys are going to be good because they earned them. Now can they follow-through that and as order patterns stay in this 10%, 11%, 12% range for the next couple of months, if that’s the case, we’ll have a stronger start and I’ll feel better about it. So that’s how I – that’s how it reads right now as you think about it, John. Okay?
Sounds good. Thanks, Dave. Appreciate it.
Yes, all the best to you. Hope to see you soon.
See you soon.
The next question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead.
Hey, good afternoon, Dave.
How are you doing?
Not too bad. Just echo, everyone else is trying to crack, congrats on the new puppy as well. I guess to stick with that theme, the bottom end of the AS guidance, a 5% looks a little bit more Zorro than Rocky here. And you spend a lot of time talking about the sensitivity to China, but I guess within that, what’s your sense on, if we do see demand rollover, I mean, aren’t there more infrastructure heavy type end-markets where traditionally they would stimulate first. I mean, it couldn’t be kind of a casual beneficiary if things do get weaker that self-fulfilling prophecy says that they would also pick backup with stimulus?
The answer is yes. And I mean, we are trying to be cautious relative to the guide and from that perspective, but my concern is I watch China, we have been doing – this is our 40th year of doing business in China. And my only concern is that if we get into a trade tensions and they decide to start saying okay, Emerson, yes, you are a local company in China, because we manufacture there. We are going to sort of block you a little bit and that’s my biggest concern in China. Right now, if the China thing was moving down towards a resolution, I would sit here and tell you today that we are going to have a strong 10 plus year in China from automation solutions and that means we are going to have a 7%, 8%, 9% of total year for automation solutions, but I would like to have a little bit more time on that and that’s why I am being more cautious about China, because I would like to see some resolution. I also know how they can come back and maybe come after companies like Emerson, if there is – if the tension continues to ramp up between the two countries. I don’t feel that at a point in time, but I would be foolish not to be concerned about that and paranoid about that and hence I must spend time going over there and work this issue. But right now, you are right, if they shift like they are shifting away from commercial and residential right now, all the commercial and residential businesses are getting hurt. Automation typically in the past would be helped. That will be the norm. So you are exactly right, I want to see it and then I will feel it, but right now, I am just being little concerned about that the China U.S. impact.
Got it. Fair enough. And then I guess similar question on the bottom of the range, I know there is some discretionary investment in there and presumably some restructuring that’s going on as well. If we hit 5% probably the world has changed to your earlier points, how much wiggle room is there on the incremental margin or kind of on a dollar cost basis, just anything we can use to conceptualize how much discretionary spend could come out if demand is weak?
Yes. I mean, the bigger – this is where the rub comes into play. Let’s say the world starts – really starting to gets struggling and so we start going towards a 4%, 5% underlying growth. We are going to have to and for the people from Emerson on the phone and as I have talked you will see, if we go to that route and to your point, what we are going to have to do is start cutting discretionary, but we are going to have to cut some of that incremental investment, because what we are going to have to do is actually raise incremental margins and that would be something that we normally would do. If our growth rate slows down to 4%, 5% range, we thought that was where we are going to be, then we would drive higher incremental margins that mean we will start – we will start cutting back in some of those incremental investments I talked about earlier in this call and I have been talking about around the world. If I see this normal growth rate at more than 6%, 7% range, then we can go forward and it will be fine. We do have flexibility. So what we are watching Frank and I and Steve and the two platform leaders are, if underlying growth is going to be more in the 4% to 5% as a corporation, then we are going to have to cut that marginal and drive higher incremental margins to make sure we can grow and hit positive earnings per share growth and that’s the game that we are going to have to play here. It’s way too early to make that call. But that’s what – those are trials that we have and we have those trade-offs. We can make those trade-offs and so that’s what we are watching right now. We talked about that to the Board. I had a dinner last night with the board talking about the same plan I presented you guys here today and this is the very question that they dived in on me how much flexibility do you have around that and that will be the game we will have to play and we will have to start playing very, very fast if we see underlying growth rates going towards 4%, 5%. And so Emerson, we can move – we will start moving.
Perfect, thanks. I will leave it there.
That’s why I got Rocket. He is much faster than Zorro. At 14, Zorro sounds slow at times.
The next question comes from John Walsh with Credit Suisse. Please go ahead.
Hi, good afternoon.
Good afternoon, John. How you are doing?
Doing well. Thank you. Fun earning season to launch into.
Yes, it’s kind of busy. I mean, the industry is a lot different. If you don’t know all the different ins and outs in this industry, it’s really hard.
Yes. Well, it’s been a good experience and it’s a lot of fun. So, I guess maybe one quick modeling question and then a broader topic, but we can do the math on the acquisition impact for ‘18. Can you just kind of help us put a finer point on the acquisition impact for next year implied in the 30% segment incremental margins?
Well, we are look – yes, well, that’s without the acquisitions – that’s just the underlying, what we are trying to – what we want from acquisitions here is we are expecting $0.03 of earnings per share of the acquisitions we have done. And the key issue for us is the underlying – the growth rate is the incremental growth rate from the acquisition, the top line is 5 point. No, what is in that 5 points, what is that this year? 2 point, what’s next year, 4 points of growth. So, top line can be 4 points of growth from acquisitions. We have a negative currency of two and then acquisitions will add EPS, but will hurt the overall margins and so that’s how we have factored in at this point in time. All acquisitions, V&C will hurt the margin, because they are coming up, but they are not at 18%, 19% margin yet obviously AVENTICS, Tools & Test and Paradigm were all margin hurting at this point and will be for several years.
Yes. Okay, thank you. And then I guess just thinking about tariffs, clearly you talked about your impact, but are you seeing any market share shifts in any of your markets? And I guess I was thinking more around commercial and residential side of the business or has there not been any big movement in shares due to the tariffs?
There has been no big movement yet. Clearly, in our commercial and residential space, there are imports obviously coming out of China that are being hit by tariffs. The question will be do those tariffs stay in place for some point in time or – and if that’s the case, then you could start seeing some share movement. But clearly at this time the share has not moved and it will not move until you see some indication that they are going to stay there for a longer time and it’s going to be more painful for some of the international supplier shipping stuff in, but not yet, it hasn’t moved yet. And I don’t think we will start seeing that until – if the tariffs stay in place well into 2019, then I think you will start seeing some shifts, but it’s got to be well into 2019.
Great. Thank you.
All the best to you. Again I want to thank everybody for joining us today. It was an exceptional year in 2018. I want to thank the organization around the world for Emerson and you did a great job. Just take a deep breath. Say congratulations and now we are moving on to 2019. And as you can tell from this call here, our investors are keenly interested in us having a very strong 2019 and I fundamentally believe we have the opportunity to do that again in 2019. So with that, goodbye and everyone have a good luck. Thank you.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.